SENATE TRANSPORTATION COMMITTEE March 11, 1993 3:38 p.m. MEMBERS PRESENT Senator Bert Sharp, Chairman Senator Randy Phillips, Vice Chairman Senator Tim Kelly Senator Georgianna Lincoln Senator Jay Kerttula MEMBERS ABSENT All present COMMITTEE CALENDAR SENATE BILL NO. 148 "An Act relating to the Alaska Railroad Corporation (ARRC); and providing for an effective date." PREVIOUS SENATE COMMITTEE ACTION SB 148 - No previous action to record. WITNESS REGISTER Senator Steve Frank Alaska State Legislature State Capitol Building Juneau, Alaska 99801-1182 POSITION STATEMENT: Gave sponsor statement for SB 148. Senator Drew Pearce Alaska State Legislature State Capitol Building Juneau, Alaska 99801-1182 POSITION STATEMENT: Gave sponsor statement for SB 148. Bob Hatfield, Chief Executive Officer Alaska Railroad Corporation P.O. Box 107500 Anchorage, Alaska POSITION STATEMENT: Commented on SB 148. Bob Poe, Legislative Staff to Senator Pearce Alaska State Legislature State Capitol Building Juneau, Alaska 99801-1182 POSITION STATEMENT: Commented on SB 148. Cathy Shultz Fairbanks Hotel/Motel Association 1717 University Avenue Fairbanks, Alaska 99709 POSITION STATEMENT: Testified in support of SB 148. Dennis Lavey Days Inn Motel 321 East Fifth Anchorage, Alaska 99501 POSITION STATEMENT: Testified on SB 148. Ralph Nogal, President Alaska Hotel/Motel Association General Manager, Anchorage Hilton 500 West Third Anchorage, Alaska 99501 POSITION STATEMENT: Testified in support of SB 148. Vernon Miller 1455 Skyline Drive Fairbanks, Alaska 99712 POSITION STATEMENT: Testified on SB 148. Leicha Welton Fairbanks Association of Bed and Breakfasts P.O. Box 80488 Fairbanks, Alaska 99708 POSITION STATEMENT: Testified in support of SB 148. Paul Welton Alaska Seven Gables Bed and Breakfast P.O. Box 80890 Fairbanks, Alaska 99708 POSITION STATEMENT: Testified on SB 148. Jim Bruckman, Member United Transportation Union 13001 Foster Road Anchorage, Alaska POSITION STATEMENT: Testified against SB 148. Jerry McCutcheon Anchorage, Alaska POSITION STATEMENT: Made comments regarding the ARRC. ACTION NARRATIVE TAPE 93-13, SIDE A Number 001 CHAIRMAN SHARP called the Senate Transportation Committee to order at 3:38 p.m. The only order of business to come before the committee was SB 148 (ALASKA RAILROAD CORPORATION), sponsored by the Senate Finance Committee. Senator Sharp noted that Senator Frank and Senator Pearce, Co-Chairs of the Senate Finance Committee, were in attendance. Number 027 SENATOR FRANK was first to testify on SB 148. He explained that his particular concern with the Alaska Railroad Corporation (ARRC) is that while they are doing a good job of operating the rail road, they are in competition with the private sector in the real estate area, particularly hotels. He said it is fine for the railroad to lease property to hotel developers or perspective hotel developers, but a distinction should be made in the area of equity participation by the railroad and guaranteeing of debt, participating in the debt obligation, and obligating the railroad. That puts them at an unfair advantage against the private sector and places the railroad in a position of risk that isn't necessarily appropriate. Senator Frank said the purpose of the legislation is to more fully define the proper role of the railroad in Alaska. The legislature speaks for the people of Alaska and they own the railroad. He said Senator Pearce has other concerns that she will speak to. SENATOR KERTTULA asked Senator Frank if he has checked into the legislative confirmation of the directors for the ARRC. Senator Frank said he hasn't checked into it, but noted it is a very valid issue and is completely logical. It is appropriate for the legislature to confirm boards of major corporations, including the railroad, AHFC, and other major assets of the State of Alaska. If it could be done within the context of SB 148, he would be receptive to it. Senator Frank said the ARRC has done a good job of running the railroad. The intention is not to thwart their ability to run a good railroad. Some would argue that railroads down south are doing all these things. The railroad has proven that they don't need to operate hotels and other kinds of non-transportation related businesses to be successful. He said he wants it to be clear that his intent is not to impact the railroad's ability to be successful or to cause undue hardships. Senator Kerttula said one thing of concern to him is that if the state is going to reduce the railroad's capacity to earn from its ancillary resource income, than we should not subsidize any competition of the railroad either. He said there is legislation to subsidize competition of the railroad such as with the transport of oil. If we are going to allow for those types of competitive programs to continue with any type of state support, then the railroad should be given broad latitude if we expect it to be able to continue. Senator Frank said Senator Kerttula's comments are well taken. Number 183 SENATOR PEARCE, Co Chair, Senate Finance Committee, said she believes that the railroad has been doing a good job at being a railroad. However, one thing that concerns her is that she thinks that the railroad should be treated much like how other treat other private appropriations of the state, including AIDA, Aero Space Authority, Permanent Fund, etc., are treated. The railroad board should be acting under the open meetings law. She said she also believes that the members of the board should comply with the Alaska Public Offices Commission (APOC) reporting. Senator Pearce said when the original legislation was passed, while clearly by statute it is allowable for the chief operating officer to also be a board member, she doesn't expect that it was intended or expected that the person would also fill the statutory position that one member of the board shall be or have been an exempted official of the U.S. Railroad and shall be selected in accordance with any requirements imposed under the Interstate Commerce Act. She said that she believes what was intended was that outside expertise would be brought in for the railroad to use on their board. Senator Pearce said one of the provisions in the bill changes that. She said over the years, the Municipal League has time and time again asked that the legislature deal with the property tax situation of the railroad. SB 148 does take a step towards that. Under the bill, land that has been leased to an agency or person for fair value, would be subject to real property taxes. That tax goes to the municipalities in which that property is to the extent of that interest. The businesses on the railroad property should be wanting a level playing field and not have tax relief. Senator Pearce thanked the committee for scheduling the bill. Number 240 BOB HATFIELD, Chief Executive Officer (CEO), Alaska Railroad Corporation, said the issues in the bill aren't new to the railroad and he looks forward to the opportunity of discussing them. Ms. Hatfield referred to page 2, line 28 "(D) the real property of the ARRC that is leased for fair value to a municipal, state, or federal agency or a person is taxable," and said that isn't something that disturbs him greatly. What needs to be researched is whether the current leases call for a pass through of the tax income. The railroad's property is appraised based on the type leasing activity that is currently being undertaken. Mr. Hatfield said he would be happy to discuss the tax issue as it has the potential of solving a lot of problems. The railroad could take a significant revenue hit if the lessees do not now recognize a tax expense. He said he hasn't any idea how much it would be but probably several hundreds of thousands of dollars. There is no vehicle to get that money back. SENATOR KERTTULA said as user of the railroad and railroad services, if you can't pass the tax on the overhead of the railroad and its costs are going to be passed on to freight users. The facilities existed before there was a town of Anchorage. There may be some historic rights. He said he isn't as sympathetic to adding to the cost of the services for that area. Senator Kerttula said unless the tax can be passed on to the renters without absorbing them or taking a big hit in the reduction of rents, it isn't in his constituent's interest in providing for a tax on the facilities. He noted he will be opposed to it. Mr. Hatfield said they would have to find a place to make up that revenue. There are many leases that are $1 a year. One of the reasons that can be done is because it is used as an offset. If we can find a good way to make this work, it may solve a lot of discussion the railroad gets involved in. Mr. Hatfield noted the leases are thirty-five year leases with five year renewals built in. Mr. Hatfield referred to the part of the legislation that refers to the composition of the board and those who should be appointed to it. He said he thinks the composition issue is a governor's issue. Mr. Hatfield said there is a portion of the bill that would subject the railroad to municipal building codes. That is something that the railroad currently does as a matter of course. He said if that needs to be clarified more, he would be willing to work on it. Another portion of the bill deals with incurring debt and leases. He showed the committee a chart he had brought and referred to it to illustrate the competitive issues they are subject to and why the financing relationships are important. Number 387 SENATOR LINCOLN referred to page 3, line 24 "A municipality bring an action in the superior court to compel payment of property taxes due from the state, municipal, or federal entity if the entity does not pay the amount due within six months after the date. In this section, "state entity" includes the Alaska Railroad Corporation. She asked if the state is responsible or if it is responsibility of the ARRC. BOB POE, legislative staff to Senator Pearce, said that particular provision relates to municipal taxation. The bill puts the Alaska Railroad under that provision. It does mean that if a municipality is not being paid property tax by the Alaska Railroad, the municipality could go after the railroad. Since the railroad is owned by the State of Alaska and if the railroad is unable to pay, they could keep going. Senator Lincoln said she thought that there were provisions where the state is held harmless with the railroad. MR. HATFIELD said as he understands the enactment legislation, the ARRC is legally and financially independent from the state. Mr. Poe said his understanding is that the improved value of the land is taxed. When the land is leased in an improved situation, then the full value, the land and the improvement, would be subject to the taxation. Senator Lincoln suggested looking at the issue in more depth. Senator Lincoln asked what the composition is of Alaska Railroad Corporation Board. Mr. Hatfield said one member is a representative of organized labor, the commissioner of the Department of Transportation and Public Facilities, the commissioner of the Department of Commerce and Economic Development, and three members are representatives of the judicial districts along the railbelt. He said there is a seventh position on the board that is to be occupied by a person with at least ten years of experience on a class one railroad in the lower 48. He noted that is the position he currently holds as he meets that criteria. All of the appointments are made by the governor and are five year terms. There was general discussion regarding developing resources in Alaska. SENATOR KERTTULA said most chief executive directors are members of the board. He said he would hate to remove the CEO from the board of directors unless there are some really good policy reasons for doing it. CHAIRMAN SHARP indicated that he concurs. Number 559 CATHY SHULTZ, Fairbanks Hotel/Motel Association, said they acknowledge the success the ARRC has achieved. However, her organization feels strongly that it is not possible for a corporation of the state to compete equally against the private sector. If the corporation is allowed to continue with their plans to diversify and develop hotels throughout Alaska without restrictions, the private sector will suffer and jobs will be lost and not gained. She referred to plans that the ARRC has to construct a hotel in Fairbanks this year and said over 450 hotel rooms are vacant for nine winter months every year. Ms. Shultz said the plan for additional hotel space in Fairbanks is a plan without merit. She said it is her organization's opinion that the ARRC should be limited to leasing or selling property at fair market value. Ms. Shultz encouraged the passage of SB 148. DENNIS LAVEY informed the committee he is a partner in the Days Inn Motel. He referred to Mr. Hatfield saying that the ARRC is legally and financially independent from the state and said he has received a letter from R. Gonzales, Contract Administrator for the Alaska Railroad. The letter reads: Dear Sir, The question whether the ARRC is required to pay lodging tax has come up from time to time. As an effort to put this matter to rest, we requested that the ARRC legal counsel review this matter in order to come up with the final determination. It has been determined by ARRC legal counsel that the corporation is an agency of the state is exempt from bed taxes in accordance with statute AS 42.40.910. Our intent is to apply this ruling to all contracts... TAPE 93-13, SIDE B Number 001 MR. HATFIELD indicated he doesn't have a copy of the letter that Mr. Lavey read from. He said the he wants to be sure that the corporation doesn't confuse what are their lines of business for the Comfort Inn with transportation activities. He said he believes that the letter involves the railroad's contract and train service employees who stay at hotels in Fairbanks and Anchorage. He said if he isn't mistaken, that policy has been changed. Nevertheless, at the time that letter was written legal counsel did review, research, and concluded that the ARRC's engineers, conductors, maintenance workers, etc., who stay in various hotels throughout the railbelt are not subject to tax. That, however, does not relate to the Comfort Inn, who paid about $160 thousand in bed taxes in 1992. He said that only involves the contracts the ARRC has with hotels for employees. Mr. Lavey said the motel he is involved with is owned by four local Anchorage residents. He indicated that they are suffering from an occupancy declines and one of the reasons is the Comfort Inn. He said he can't compete when the ARRC who is a 40 percent partner. Mr. Lavey said he currently charges $39 a night and if the ARRC is selling rooms for $26 a night, how could he possibly compete. He urged that the legislature to put some curbs on the ARRC as far as getting in to the private sector. RALPH NOGAL, President, Alaska Hotel/Motel Association, indicated he is also the General Manager of the Anchorage Hilton. He said on behalf of their 65 hotel/motels in his association, they encourage the legislature to pass legislation to limit the ARRC from going into the hotel business. They feel that the ARRC running hotels is in competition with private industry because of the fact that the railroad is owned by the State of Alaska. The railroad is a 40 percent partner in the ownership of the Comfort Inn, a 96 room property in the Ship Creek area. The construction financing of the property was easily obtained because of the railroad ownership. The railroad gave the hotel operator start up money, $500 thousand, for a period of time without any interest charges. He said he understands that the hotel operator still had not obtained vital financing for the project. Mr. Nogal said some members of his organization have tried to expand their businesses but have been unable to get financing for additions. He asked what will happen if the Comfort Inn cannot meet its applications and defaults on its operation. As he understands, the railroad assumes full ownership. He asked who will be responsible for the maintenance of the hotel. The Alaska Hotel/Motel Association understands that the ARRC is planning to build hotels in Fairbanks, Denali, Whittier, Seward and Anchorage. What is their basis for planning the hotels, he asked. He urged that the legislation to be passed into law. Number 081 VERNON MILLER was next to testify from Fairbanks. He said he is very familiar with 45 U.S.C. 1201-1214 the Act of 1982. Mr. Miller said he would like to ask why the railroad doesn't stick to the business of railroads as it was a $200 or $300 million gift from the federal government. CHAIRMAN SHARP said he will try to get the answer and make it available to Mr. Miller. LEICHA WELTON, representing Fairbanks Association of Bed and Breakfasts, an association of approximately 40 members, was next to speak. She said their concerns are within the proposed construction of a hotel by the ARRC in the downtown Fairbanks area. She asked how the ARRC proposes to fill vacancy in the new hotel when current bookings of the ARRC can only fill approximately ten rooms. There is a chance that the future relocation of the Alaska Railroad would be directly adjacent to the new hotel and would create an instant market for the ARRC owned hotel. She asked if a state corporation can justify securing a loan for financing of a private hotel and enjoy advantages, such as low interest payments, that other private industry cannot enjoy. Ms. Welton asked what impacts an outside interest will have on the growth and development of a Fairbanks economy and will this contribute to the growth and development of tourism in Fairbanks. She asked if the Chena River Commission has been informed about the possible implications of a failure to complete the proposed tourism developmental access at the area where the proposed development of the hotel will take place. Ms. Welton asked if it is appropriate that a hotel chain should be able to use a state corporation to benefit their own financial well being. Other concerns are the past track record where purchasing procedures that were not followed pursuant to Alaska State Ordinance 36.30. Ms. Welton said it is possible that half of the hotels in Fairbanks are owned by outside interests and there is concern about an even greater cash flow going to the lower 48. She urged the committee to vote in favor of restricting some of the activities of the ARRC. CHAIRMAN SHARP asked Ms. Welton to please send her questions to his office. PAUL WELTON, representing Alaska Seven Gables Bed and Breakfast, said there were two seminars given by the Small Business Development Center regarding starting and managing bed and breakfasts and there is the other side of government which seems to be competing and taking away the opportunities. He discussed the different things that a person must go through to open a bed and breakfast such as regulatory agencies such as fire marshall, DEC, zoning requirements, etc. He informed the committee of the hardships of filling the already existing rooms. Mr. Welton thanked the committee for listening to him. Number 197 JIM BRUCKMAN, Member, United Transportation Union, explained he has been a conductor on the railroad for 23 years. He said there are members concerned about their jobs and they are worried that the railroad won't be able to compete. He said the railroad does need to diversify and compete. Mr. Bruckman said that many of the major hotels are owned by outside interests and the money doesn't stay in Alaska. Most of the employees are hired from colleges outside of Alaska. The money the Anchorage Comfort Inn receives stays in Anchorage and they hire Alaskan employees. SENATOR LINCOLN referred to several letters in her committee packet from ARRC employees urging the legislators to vote "no." She asked what specifically that the employees don't like about the bill. Mr. Bruckman said they don't like the part that doesn't allow the CEO to be on the board. He said the employees want somebody that knows the railroad, the railroad business and the day to day functions. The ARRC needs a steady income and it is important to have some sort of stability. Senator Lincoln said she hopes that the employees are not looking for diversification just for diversification sake. Surly, the employees understand that we can't diversify just to employ people. You have got to have the income stream coming in to justify a diversification. Senator Lincoln said she doesn't see in the bill where diversification is not allowed. Senator Lincoln said government entities shouldn't compete with the private sector, but somewhere we have to look at how we can generate revenue for the state as revenues are declining and there are increases in expenditures. She said the composition of the board looks good. She asked if the employees are concerned about the CEO not sitting on the board. Mr. Bruckman said not in those exact terms. The only person that has experience on the board, not including the current CEO, is a member of the United Transportation Union, Mike Olsen. Senator Lincoln asked who the board member is that is an executive official of a U.S. Railroad. MR. POE said Mr. Hatfield serves as the CEO and has the role of the railroad experienced board member. He said the change in the bill suggests that you need both. If you are lucky to get a CEO who has ten years of railroad experience, that is great, but there still needs to be a board member with ten years of railroad experience. MR. BRUCKMAN said there is concern about removing Mr. Hatfield, or whoever that person is that has ten years experience. He said they want someone on the board who knows day to day operations and the railroad business. He referred to diversification and said he has worked jobs putting in the fiber optic cable between Seward and Eagle River. He said he believes that the bill would limit such jobs in the future. SENATOR KELLY asked how many people the railroad employs. MR. BRUCKMAN indicated that there are approximately 700 employees. Number 310 SENATOR RANDY PHILLIPS referred to the fiber optic cable and said he assumes it cost $1 million or more. He referred to the statute "(A) incurring debt, except in certain circumstances, in excess of $1 million;" and said anything occurring that costs over $1 million would be subject to legislative approval. Senator Randy Phillips said the bill, in his opinion, limits the railroad to transportation and not other areas such as hotels and hotel management. He said the railroad is a state asset owned by the people of Alaska. It should be managed like a business and not run. The people of Alaska are shareholders have a right to look at the management style and the management itself of the railroad. JERRY MCCUTCHEON, testifying from Anchorage, said he doesn't believe that the railroad is doing a good job. He referred to the ARRC 1991 Financial Statement and said he has some serious questions as to how long the railroad can keep on operating. The ARRC 1992 Financial Statement will be available in sometime in April and they will begin to tell a pattern of activity. He discussed management of hotels throughout Alaska and how it isn't an easy business. Mr. McCutcheon said there should be more openness to the railroad and there should be some kind of a review. He thanked the committee for listening to him. Number 437 SENATOR KELLY asked where the $9 million is for the Wishbone Hill train. MR. HATFIELD said the $9 million for the Wishbone Hill train is now up to over $11 million and is in two CDs fully insured in two banks. Senator Kelly asked how they are carried on ARRC's books. Mr. Hatfield said they are carried as an asset and a liability. Senator Kelly asked if the money is safe. Mr. Hatfield said that it is safe and insured. CHAIRMAN SHARP said the bill would be back before the committee at a later date. Number 465 Chairman Sharp adjourned the Senate Transportation Committee meeting at 5:04 p.m.